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PayNearMe Targets 'Underbanked' Americans

(This story was corrected to show that Facebook is no longer a partner of PayNearMe.)

For the 25 percent of Americans who lack credit or debit cards, a startup called PayNearMe wants to make paying utility bills or transferring money as easy as buying a Slurpee at 7-Eleven (3382:JP).

PayNearMe, based in Mountain View, Calif., announced a partnership on Tuesday, May 10, with 7-Eleven and Ria Financial Services to let consumers pay bills and wire funds using cash—with lower fees than apply to money orders and Western Union (WU) transfers.

U.S. consumers used cash to make about $1.2 trillion in purchases last year, according to research firm Aite Group. Still, Americans without bank cards face hassles trying to pay bills, shop online, or make travel reservations. PayNearMe's technology can be used to buy everything from bus and concert tickets to books on Amazon.com (AMZN) by walking into the nearest 7-Eleven store.

"The `underbanked' is a giant underserved market," says Danny Shader, who founded PayNearMe in 2009 after selling his previous companies to Motorola (MMI) and Amazon. "We're making it better, faster and cheaper for them to transact."

Amazon.com is already working with PayNearMe, which also announced partnerships on Tuesday, May 10, with travel company Greyhound Lines (FGP:LN) and with Sochitel UK, which lets consumers add minutes to prepaid phone plans.

Startup Goal: Facebook Payment Medium

Shader started the company with the name Kwedit and the mission of helping players of Facebook games buy virtual currency with cash by printing out receipts and taking them to 7-Eleven. He soon discovered that there was greater demand from more traditional offline merchants. He changed the name to PayNearMe last year and has been working with 7-Eleven to attract such industries as entertainment and financial services. The company is no longer working with Facebook.

Khosla Ventures led a $16 million investment in PayNearMe in November, in part to help the company expand its roster of merchants. Other investors include August Capital, True Ventures, and Lotus Development founder Mitch Kapor.

"There isn't a company on this planet that wouldn't appreciate 25 percent more market," said David Hornik, a partner at August Capital in Menlo Park, Calif., who has been investing in payment startups for a decade. "The big opportunity is to enable a set of transactions that nobody else has enabled."

For the business to work, it will have to process hundreds of millions—if not billions—of dollars in transactions a year, because PayNearMe takes only a small cut of each, Shader said. The amount varies by type of product and customer. Sometimes the cost is absorbed by the merchant and other times by the consumer, said Shader, who didn't provide specifics.

The expense consumers incur to send bills and to wire money using PayNearMe is cheaper than that for money orders or transfers through Western Union, he said. Ria Financial, a unit of Leawood (Kan.)-based Euronet Worldwide (EEFT), will handle money transfers and bill payment services on PayNearMe's behalf.

Rivals: Green Dot and Netspend

PayNearMe faces competition from Green Dot (GDOT) and Netspend Holdings (NTSP), which provide reloadable prepaid cards that consumers can purchase in supermarkets and convenience stores. Both companies held initial public offerings last year.

Shader says the ability to pay bills is the biggest advantage to PayNearMe. Some 3,000 billers have signed up to use the system, he says. The bills will carry a 7-Eleven logo at the bottom, next to a bar code with directions on to how to pay with cash. Customers can take the bill to a store, have the checker scan the barcode, and then make the payment. The money is automatically remitted to the biller through the payment network that PayNearMe built.

The same applies to merchandise purchased online from Amazon.com and to bus tickets from Greyhound. Rather than going to the local station, waiting in line, and chancing that the bus might be overbooked, travelers can book a trip online, print a PayNearMe slip, and take it to 7-Eleven. There, they pay in cash and use the receipt as the bus ticket.

"PayNearMe will ultimately enable us to add thousands of ticketing locations, so that our customers can easily get tickets any time of day," Dave Leach, chief executive officer of Dallas-based Greyhound, said in a statement.